General Motors reported earnings today for the 2nd quarter of 2014. The early prognosis is not good with share price falling after the report. While it is difficult for the Mom and Pop investor to sort through GM’s myriad of charges, special items and various smoke and mirrors, there are some key take-aways that give a glimpse of GM’s financial health. Primarily, debt continues to grow at the company, now exceeding $40 billion while earnings are propped up by special items.
Analyzing the levels of cash compared to debt at GM is probably the easiest way to get to the truth behind the many numbers thrown about in the earnings report. In just the past three months at GM, short and long term debt has grown from a hefty $37.8 billion to an even heftier $40 billion. This key fact gives a contrarian view to what the media and GM always seem to focus on, GMs supposedly huge cash horde.
GM’s cash and marketable security levels are just fine. They rose over the past three months from $28.1 billion to $29.8 billion. Doing the simple math, however, shows that the picture is not as rosy as first appears. Cash and marketable securities up $1.7 billion in three months while short and long term debt rose $2.2 billion.
New GM is increasingly looking like Old GM with high debt levels and a reliance on smoke and mirrors to fool investors into believing all is great in GM World. One of the primary drivers to improve the perception of GM’s earnings was a tax benefit while charges for recalls were blamed for the earnings disappointment. Ironically, GM benefits from what most corporations are criticized for; they are not paying their fair share of taxes!
In fact, GM’s earnings statement shows that, not only does GM not have tax expenses; they have a tax benefit of $340 million. Earnings numbers were still disappointing with the many recalls that seem to come on a daily basis being blamed. GM attributed $1.2 billion to expenses relating to the recalls.
The accounting is tough to get one’s head around as GM stated that they had “a pre-tax net loss from special items of $1.3 billion” and “costs of $1.2 billion” for recall related expenses. The important fact to note is that GM has yet to incur most of the expenses that they claim are affecting this past quarter’s earnings! As bad as things currently look, they will get worse for GM when the costs of the recalls actually have to be paid, particularly if they exceed what I believe are low estimates of the true costs.
There are a couple of other ways to get past the shady accounting methods of GM to get a picture of how healthy the company really is. One is to look at operating income at GM’s automotive group for the 2nd quarter, which was negative according to the income statement. The company shows a loss of $735 million before the fluff is thrown in.
Another way to look at how well (or not) GM is doing is to look at market share for vehicle sales. Year over year global market share fell from 11.6% to 11.3%. North America market share fell from 17.3% to 17.2%. GM also has to continue to spend on incentives to drive sales with incentives running at 1.1 times the industry average.
GM continues to benefit by having a perception of financial health that comes from a media (which coincidentally receives huge ad revenue from GM) that seems to treat the company with kid gloves. Financial analysts seem to give the company favorable treatment, as well. The rising debt picture, loss of market share and diminishing earnings at GM give evidence that the company is not doing as well as those in power would have us believe. The reliance on shady accounting and a manipulated public perception of the company will not stop the downward trend at the company if GM does not focus on the simple key to success in the auto industry; build better cars that consumers want at the best value.
GM’s balance sheet is increasingly looking eerily similar to Old GM’s. At debt levels of over $40 billion, it may start to become more difficult for GM to raise money through further debt offerings. Ratings agency will have to start considering downgrading GM’s credit ratings. The proverbial straw that would break the back of GM would be an economic downturn for the auto industry. Just think, if GM can not capitalize on the hottest auto market in years, what will happen to them in a downturn? The obvious answer seems to be that they will have the same destiny as Old GM, which ends with a return trip to bankruptcy court.
Mark Modica is an NLPC Associate Fellow.